Government Subsidies and Handouts to Companies

There has been a lot of bluster over the last week regarding the Australian Governments decision not to support one of our local car manufacturing companies (Holden) with a cash injection to support the business and allow them to continue operating in Australia. In the end the Government decided not to provide financial assistance and the General Manager responded by saying that they would close up shop in a couple of years time.

Government assistance is one of those tricky areas, many people like it because it allows people to remain employed, but on the flip side, it costs tax payers money to fund a business that is not profitable. I can see the pros and cons of both arguments and in this particular case the car industry has received handouts for a very long time and has been hit particularly hard by the high Australian dollar and the high cost of wages in Australia when compared to many other companies around the world.

The government is in a really sticky situation as they provide huge amounts of tax breaks / subsidies as well as direct assistance to many different industries, so how do they select which ones get help and which do not. I remember in the middle of the GFC many retailers going bust and sending plenty of people out of work, but the government didn’t do a thing. Yet at the same time both Mining and Manufacturing got massive subsidies and cash injections to keep people employed. It smells a little bit like favoritism to me, perhaps the retail sector doesn’t provide as much financial contributions to election campaigns as the other industries…

The way I see it is we (Australia) have made a rod for our own back through the following:

The government has supported industry so many times in the past.

The RBA has sat idle while every other reserve bank has been fighting currency wars with each other to devalue the dollar and boost export competitiveness.

Wages in Australia are very high on a world scale, which is great for the standard of living, but poor when it comes to employing someone.

Australia has high tax rates and seems to keep introducing new taxes every other year, which doesn’t instill a lot of confidence to a global company wanting to do business down under.

It looks to me like the current government is wanting to curb their spending *kudos from me*, however I expect that the majority of voters will not respond well to this when they are unemployed due to the halt of the government gravy train.

I expect this will end one of 2 ways in the long run:

We could end up like the Americans who had their government bail out a heap of insolvent companies (including too big to fail banks…) at the expense of the tax payer, and their children, their children’s children and even those children who aren’t even thought of yet. OR

We allow companies to fail and people lose their jobs in ever increasing numbers. No new companies want to expand into Australia due to the reasons listed above and we go through a Nationalism movement much like Greece and Spain are seeing right now.

Neither of these outcomes are palatable to me, but it is what I can see happening one day. The only way I see things not ending up in one of those options is that Australia needs to take a reality pill and accept a reduction in our standard of living, become more productive, reduce company tax rates and the Aussie dollar to help drive new investments in this country. We also need to be cautious in supporting unprofitable businesses and perhaps start providing incentives for new businesses to grow and eventually hire more people.

Glen, I can see both sides, but at the same time, I think we have to let them fail. Our bailouts didn’t do a darn thing for the USA in terms of monetary recovery. The jump in sales for the automakers was largely due to the fact that the govt turned around and bought a boatload of govt. cars from the company they bailed out, and now things aren’t much better! Government was never meant to be used for the purpose of bailing out private companies, and in the case of the U.S. we can’t afford to!Laurie @thefrugalfarmer recently posted..Homesteading: Why We’re Keeping our Back to Basics Lifestyle for 2014

I have to disagree. Without the government bailout of the auto industry, there would have been millions of additional people out of work in 2008. We really would have been in a Great Depression 2.0.

I don’t have an answer for Australia. As with anything in macro-economics the situation is complex. Almost anything the government does will end up hurting someone. The key is what is the best way to minimize the hurt.Bryce @ Save and Conquer recently posted..Senior Discounts

It’s such a complicated issue. I want to say let them fail, but the unemployment would have been even more rampant and the government would be paying out those benefits anyway.Stefanie @ The Broke and Beautiful Life recently posted..Budget Travel: 3 Days in Las Vegas

I’m not as familiar with Australia’s governments position on hand outs up until this point, but when it comes to countries doing this, it’s really sticky. They are stuck between a rock and a hard place, and the tax payers are dragged along with it – with both outcomes. Yikes.Tushar @ Everything Finance recently posted..3 Lessons Monopoly Can Teach Us About Finance

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